General Flashcards
What is technical analysis?
Study of market action in the purpose of forecasting future price trends
What are the 3 important elements of technical analysis?
Open Interest
Volume
Price
What are the basic tenants of Dow Theory?
1) The averages discount everything - the sum and tendency of the stock represents Wall Streets Knowledge of the market action
2) That the market has three trends called primary, secondary and minor. Defined as an uptrend, downtrend, and consolidation.
The secondary trend represents corrections in the primary trend lasting about 3 weeks to 3 months. Retracement happens about 1/3 and 2/3s of the trend movement.
The minor trend usually lasts less than 3 weeks. Showing fluctuations in the intermediate.
3) Major trends have three phases - Dow stated that the primary trend that there are 3 distinct phases: an accumulation phase, public participation phase, and a distribution phase.
Accumalation phase - represents the buying from investors when the previous trend was down. Assumption that the market assimilated all the bad news is made.
Public participation - is when most technical trend followers participates and prices move rapidly. Business news improves.
The distribution phase - newspapers print bullish stories and economic news is better than ever. Speculative volume and public anticipation increases. Investors who bought at the bottom begin to distribute before selling before others do
4) Averages confirm each other - Dow states that both averages must give the same signal (industrial and rail averages) therefore confirming each other before giving a bull or bear market signal. Both averages must surpass the secondary peak to confirm the inception or continuation of the bull market.
When the two averages diverged from each other. It is considered that the prior trend is maintained.
5) Volume must confirm the trend - Dow stated that is the second most important factor when it comes to confirming price signals. Volume should expand or increase in the direction of the major trend. In a major uptrend, volume increases when the price movie is higher and decreases when prices fall. Vice versa with the downtrend.
6) Trend is effect untill it gives a definite signal that it has been reversed - trader must spot reversal signals by using S/R levels, price patterns, trendlines and moving averages.
What is open interesr?
Open interest is the number of outstanding future contracts that are held by participants held by longs and shorts
How does open interest and volume significant in futures trading?
- Tells us what contracts are most liquid.
- Tells us which contracts trading activity should happen in with the highest number of open interest
- Months with low interest should be avoided.
What does a sideway market tell you?
- The market is trendless
- Prices are moving flat and considered to be in a trading range
- Sideways markets means that there is a period of equilibrium where suppy and demand is balanced
- It is advised to stay out the market in sideway markets if using trend following technique
What does support mean and resistance?
Support - Is a level under the market where buyinfg interest is stronger than selling pressure.
Resistance - Is where selling pressure overcomes the buying pressure and price advance is turned back.
How does support and resistance behave in an uptrend?
Resistance pauses the uptrend and is exceeded at some point.
Each successive support level is higher than the one preceding it. Each rally high (resistance level) is higher than the one preceding it.
If the price of a corrective dip in the uptrend happens and goes to the previous low - an early warning of the end of the uptrend to a sideway trend is apparent. If support is then violated then a reversal is pending.
How do support and resistance behave in an uptrend?
Support levels are not able to stop the downtrend.
How can the significance of the support and resistance levels be assessed?
- Amount of trading at the given support or resistance area ( by checking the amount of tme spent there, volume and how recent trading played out)
- The longer the period of time that price is traded in the support or resistance area. ( if the price is trading sideways for weeks in a congestion area before moving to the higher point, the support area would be more important)
- Volume on the support and resistance tells the significance of support and resistance. If a support level is formed on heavy volume then that means that the support level is significant.
- The distance that is traveled by price when a break of the S/R levels occurs after a serious penetration - penetration levels of around 1% and 3%
How can you test the validity of a trendline drawn?
- Evidence of a trend being present must be there and there must be two reaction lows
- There must be a penetration on the second peak to confirm the validity
- A retracement of 50% of waves 2-3
What constitutes a break in the trendline?
- Close beyond the trendline - a price filter for 3% can be applied to filter noise. (3% of underlying +- the current value of S/R levels)
- Prices must break the trendline for two consecutive days.
What does the gradient of a trendline tell you in an uptrend? (i.e. flat, steep)
Flat - suggests that an uptrend is to weak and probably suspect
Steep - It usually indicates that the rate of ascent is not sustainable
When do you adjust trendlines?
- Trendlines are adjusted to fit slowing or steep trends in the market when the orginal trendline is too flat
When is it best to deploy moving averages when tracking a trend?
When the trend is accelerating, moving averages can be applied and several steeper trendlines are required to catch up with the accelerating trend
